Gold prices continue to rise for the third straight season, and while many factors contribute to these climbing prices, one common denominator seems to be Federal Reserve’s actions. The reaction from Jerome Powell, a chairman of the Federal Reserve, an attorney, and an investment banker, on the state of the U.S. dollar, treasury yields, and interest rate levels only increases gold’s attractiveness. With Powell’s unpromising remarks regarding 2023’s economic landscape and the continuously softening U.S. dollar, more investors flock toward gold to protect their purchasing power, spiking its prices.
Micheal Hewson, the chief market analyst at CMC UK, explains that gold prices “have continued to edge off the lows we saw at the end of last week as a slightly softer U.S. dollar prompts a squeeze back towards the $1,895 area.” As the Federal Reserve members create mentions of disinflation policies, they’re “helping to create this squeeze. However, evidence that inflation may not come down as quickly as expected could act to limit the upside in this rebound.”
The Economic Club of Washington D.C. recently hosted a question-and-answer session that sparked Powell’s remarks. To start, Powell restated that the Federal Reserve plans to further hike up interest rates and that they likely won’t begin cuts until next year or later. He explained that in the Federal Reserve’s eyes, disinflation has now commenced.
Amidst these remarks, the U.S. stock market teetered up and down but finished the day on a high note, showing that investors did not take Powell’s opinions to heart.
Kinesis Money’s market analyst, Rupert Bowling, explains, “The gold market seems to have an element of traders and investors hearing what they want to hear rather than what is actually said as, despite the Fed Chair saying on Tuesday that further interest rate hikes are needed to fully curb inflation, his tone was interpreted as less aggressive than previous and therefore the reason for gold to gain.”
While gold may have reached impressive high levels this session, it also dipped a few times. Investors don’t always know how to respond to the Federal chairman, who “actually stimulated a bumpy ride for the dollar index,” according to Naeem Aslam, AvaTrade’s chief market analyst. Gold prices will likely show short-term volatility as investors digest Powell’s remarks, consider other market factors, and develop their opinions on the matter.
“Many in the market are now anticipating a possibility that it is highly likely that we are going to see more than one interest rate hike of 25 basis points from the Fed, which means that the dollar index has more room to surge,” Aslam explains further. “Any strength in the dollar index basically represents a threat for the gold bulls who have been thinking that the glory days for the dollar index are well passed.
Gold’s performance heavily relies on inflation and thrives in periods of economic turmoil. As inflation rates soar, investors flock toward a steady and safe asset that can protect the value of their funds, but the second inflation starts steadying, gold becomes less appealing.
“If inflation readings do show a better performance, we could see a complete shift in the current narrative,” Aslam adds. With more Federal Reserve officials scheduled to give speeches this week, investors have their ears tuned to what they want to hear. “Their opinions would not matter that much now especially given that we heard from the Fed chairman only last night, but they will add more noise in the market,” Aslam explains.
Additional remarks from Fed members show similar opinions regarding the U.S. economy’s future. The president of the New York Federal Reserve, John Williams, stated that the central bank must preserve “restrictive” interest rates for the next few years to restore high inflation levels back to the low rates experienced before the pandemic. Meanwhile, Christopher Waller, a Federal Reserve Board of Governors member, claims that he’s “prepared for a longer fight to get inflation down” and believes interest rates must stay high for “some time” to eradicate the intense price pressures in the current market.
The Federal Reserve’s actions have enormous impacts on gold prices. Results from the annual London Bullion Market Association survey show that gold prices will increase by 3.3% in 2023, with the major contributing reason being Federal Reserve actions.
While inflation will inevitably balance at some point, it shouldn’t ruin gold’s performance. Although gold prices may dip here or there, the investment provides long-term price protection over decades of economic ups and downs.